Louisiana-Pacific Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. LP manufactures engineered wood building products, including siding, OSB and engineered wood products, and reports four segments: Siding, North America OSB, EWP and South America. Results are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $691.3 million | $610.9 million |
| Gross profit / margin | $176.8 million / 25.6% | $128.1 million / 21.0% |
| Operating income / margin | $127.2 million / 18.4% | $75.4 million / 12.3% |
| Continuing-operations income | $94.9 million | $55.0 million |
| Net income | $90.9 million | $55.0 million |
| Diluted EPS | $0.62 | $0.38 |
| Adjusted EBITDA from continuing operations | $159.4 million; 23.1% margin | $114.1 million; 18.7% margin |
| Cash provided by operating activities | $30.7 million | $20.8 million |
| Capital expenditures | $43.2 million | $26.1 million |
Operating cash flow less capital expenditures was negative $12.5 million in Q1 2018. Cash and cash equivalents were $895.7 million at March 31, 2018; cash, cash equivalents and restricted cash totaled $909.1 million, down $32.2 million from the start of the quarter. Total debt was $376.2 million, comprising $25.1 million current and $351.1 million long-term. Current assets were $1,405.6 million and current liabilities $237.6 million. LP paid $18.9 million in cash dividends.
Changes and segment results
- Sales rose 13% year over year and operating income increased $51.8 million. Management attributed much of the improvement to higher OSB prices; the OSB price increase contributed an estimated $50.1 million to operating results across North American operations.
- OSB: Sales were $313.3 million, up 17%; operating income was $97.4 million, up 60%. Adjusted EBITDA was $112.5 million versus $75.7 million. Commodity and value-add selling prices rose 18% and 15%, respectively.
- Siding: Sales were $227.0 million, up 6%; operating income was $45.3 million, up 11%. Adjusted EBITDA was $53.7 million versus $49.0 million. Higher pricing was partly offset by lower fiber siding shipments and higher resin costs.
- EWP: Sales were $100.7 million, up 23%; operating income was $2.8 million versus $0.8 million. Management cited stronger demand, higher prices and improved mill utilization.
- South America: Sales were $42.4 million, up 12%; operating income was $8.9 million versus $5.1 million. Higher prices were partly offset by product cost increases.
U.S. housing starts were 8% higher year over year, and the reported average OSB prices across three U.S. regions increased from Q1 2017. Inventory rose to $329.4 million from $259.1 million at year-end; operating cash flow also reflected higher inventory and lower accounts payable and accrued liabilities.
Outlook, accounting, and risks
- LP expects 2018 capital expenditures of approximately $200 million to $250 million for siding expansion, growth and maintenance projects, and South American expansion. It expects $10 million to $12 million of pension contributions during the remainder of 2018. The filing provides no specific earnings or sales guidance.
- The Dawson Creek OSB mill was moved into the Siding segment effective January 1, 2018, ahead of an expected conversion to siding later in 2018. A Canadian government program grant of $3.1 million was received in connection with the conversion.
- Adoption of ASC 606 used the modified retrospective method; comparative 2017 results were not restated. For Q1 2018, the company reported that the standard reduced sales by $11.1 million and net income by $2.9 million versus amounts without adoption. Management expected the ongoing net income impact to be immaterial.
- Q1 2018 included a $4.0 million after-tax loss from discontinued operations, including a $5.0 million increase in reserves for discontinued composite decking products. Q1 2017 included a $3.4 million warranty-reserve charge for certain CanExel products; Q1 2018 included a $0.4 million gain related to a previously settled hardboard siding claim.
- Key exposures include housing-market cyclicality, OSB commodity-price volatility and product concentration, raw-material and resin costs, transportation availability and expense, foreign exchange, environmental obligations, and product warranty and other litigation. Management said environmental and other legal exposures are uncertain and may change; no estimate of the possible range of environmental reserve changes was provided. Management considered existing warranty reserves adequate but stated additional future charges are possible.
Important facts for investors to verify
- Whether OSB pricing and housing demand remain supportive, given their significant contribution to the quarter’s earnings improvement and LP’s exposure to commodity-price declines.
- Execution, timing and cost of the Dawson Creek conversion and the planned $200 million to $250 million capital program.
- Inventory and working-capital trends and the ability to convert reported earnings into operating cash flow.
- The effect of ASC 606 when comparing reported 2018 sales and earnings with prior periods, which were not restated.
- Potential developments in discontinued decking, warranty, environmental and other legal contingencies, for which future cost ranges are not clearly quantified in the filing.